Going by Finance Minister Arun Jaitley's comments, if some sort of a privatisation does happen in IDBI Bank, then it will be positive for the bank and result in a re-rating, says Vaibhav Agrawal of Angel Broking. However, he cautions that even Axis Bank took a number of years to reach to this kind of valuation. So just the event may not result in re-rating.
In an earlier interview with CNBC-TV18, Jaitley had said: "There's a little flexibility we have with regard to banks which are not under the Banking Companies Regulation Act, for which no amendment is required, which are only registered with the Companies Act. Axis Bank for instance, that's the model, where through various government instrumentalities there is a major shareholding that the government has but the government maintains an arm's length distance and it's a bank that has done remarkably well. Therefore, can we with regard to any other institution that we have, the IDBI, follow that model and therefore its levels of professionalism, level of quality, its freedom of decision making, its autonomy, etc., can be maintained."
Post the minister's comments over the weekend, the stock has gained nearly 23 percent. But if in case, the event does not occur, Agrawal feels asset quality concerns will once again take centre-stage and the stock price momentum may reverse.
Below is the verbatim transcript of Vaibhav Agrawal's interview with CNBC-TV18's Sonia Shenoy and Anuj Singhal
Sonia: Coming on the point that we were trying to make that so far IDBI Bank as a stock has not given much returns to investors. If indeed some sort of privatisation or autonomy is given to IDBI Bank then how do you see the bank itself move and the stock?
A: If that actually happens that would clearly be a big positive for the bank's overall outlook and there would be some degree of rerating. Obviously like other Public Sector Undertaking (PSU) banks it is trading at 0.6-0.7 times. The only point that I would mention is that even Axis Bank took a number of years to actually reach this level of valuation. Up till 2004 even it used to trade at about 1.1 times price to book because it was still more or less a corporate bank at that time and it took it about three or four years to build up that retail franchise and a very consistently high profit growth. And as it happened the market rerated the stock. So, it is unlikely that just by the event itself IDBI would immediately rerate to a very high level, but definitely there would be some rerating if the event actually happens.
Anuj: So, this week the stock has already rallied quite a bit, purely on hopes. Is majority of near term rerating over or do you think once the actual event takes place and when that takes place the stocks can rally a bit more? Conversely if that does not take place does the stock go back to the previous lows?
A: Yes, actually if the event does happens there would be more room for upgrade. But if it gets delayed, if it does not happen what we have faced within the near term is the fact that in the last two quarters as well the bank has seen substantial amount of slippages and its corporate book does remain a bit of a problem. Exposure to stress assets even related to other PSU banks almost 1.5 more relatively than some of the other larger PSU banks as well. And the problem with IDBI Bank is that legacy of lending to large corporates has to an extent continued. So, in the near term if this event does not happen again the asset quality concerns would once again weigh in. So, we would not recommend buying the stock right now itself considering it is a speculative event but yes, once it happens then there would be lot of room as things evolve.
Sonia: So, once it happens just assuming that this does go through then what kind of upside do you see for the stock?
A: Like I said in the near term itself possibly the stock could start going towards the one-time price to book mark as well. If there is visibility that the process improvements and such things would start happening of course one should also remember that Axis Bank when it started really the whole market was available for taking and few private sector banks could grow very fast which may not repeat at the same pace at this point but definitely there would be room for some rerating but the bigger part of the rerating would only happen when things actually starts improving because these are big institutions and they would take a lot of time to actually evolve to the full extent.
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